Growers wary of 2011 fertilizer price situation

• During the 1960s, 1970s and 1980s, world nutrient demand rose in a fairly predictable fashion. That made it relatively easy to plan new nitrogen plants, new mines and things like that.
• Such ease of planning was wiped away in 1989 with the collapse of the Soviet Union.
• Several factors should lead to increases in long-term fertilizer demand.

Until recent years, fertilizer prices had held relatively steady for U.S. farmers. Then, in 2008, fertilizer prices made a rapid, alarming ascent before hitting record levels in the fall.

Several years later, still-skittish farmers haven’t forgotten that 2008 price run-up and many wonder what 2011 might bring. The National Corn Growers Association tried to provide growers some answers during a recent Webinar.

“We have nearly 80 million new mouths to feed annually,” said Harry Vroomen, vice-president of economic services at The Fertilizer Institute (TFI). Heading into 2011, “world grain stocks are relatively low and U.S. farm income is strong. The world and United States will be growing out of recession.”

It should be noted that because TFI represents the fertilizer industry, the U.S. Department of Justice “prohibits us from making explicit fertilizer price forecasts. … But I will discuss the supply/demand factors driving the market.”

Fertilizing materials “are commodities like corn, soybeans and wheat,” Vroomen reminded his audience. “They’re priced in U.S. dollars around the world and traded widely.

“Many of the same fundamentals that caused record grain prices in 2008 led to the record fertilizer prices in a combination of demand-pull and cost-push factors. Significantly higher transportation costs, the falling value of the U.S. dollar and other factors also played a role.”

During the 1960s, 1970s and 1980s, “world nutrient demand rose in a fairly predictable fashion. That made it relatively easy to plan new nitrogen plants, new mines and things like that.”

Such ease of planning was wiped away in 1989 with the collapse of the Soviet Union. The collapse of Communism meant nutrient demands in the region declined by 70 to 90 percent. European policies “also resulted in a continuous decline in demand in that region. Overall, nutrient demand fell by 17 percent over a five-year period (of 1990 through 1995).

“Imagine if world corn demand fell by 17 percent and the impact that would have on the corn market.”

Fertilizer use fell

Fertilizer use during the period fell by 9 percent for nitrogen, 23 percent for phosphates and 30 percent for potash. This led to “overcapacity in the industry and a very poor investment environment with respect to planning a new plant or mine.”

For the next five years, 1995/1996 through 2000/2001, “world nutrient demand rose by only 7.9 million nutrient tons. We were still 5 percent below the peak of 1988/1989. Nutrient use actually fell in the United States in this period but the drop was more than offset by an increase in the rest of the world. Overall, world demand rose by only 1 percent a year during this period.”

While showing a chart illustrating the number of acres of world grains harvested and total world grain production, Vroomen said ultimately it is “agriculture that demands fertilizer demand and it was that demand which turned things around.” The chart shows “the number of acres harvested peaked in 1981 and is still down 5 percent from its peak. Yet, world grain production is up more than 50 percent since 1981.”

At the time, 2004 to 2008 experienced “the largest levels of world grain production on record. All exceeded 2 billion metric tons. These record crops required significant nutrients and are the driving force behind the recent increase in world fertilizer demand.”

From 2000 to 2007, fertilizer “world demand grew by nearly 23 percent … for an average of over 3 percent a year. Nitrogen use grew by 22 percent, phosphate by 17 percent, and potash by a whopping 31 percent.”

The majority of this growth took place in China, India and Brazil.

“Chinese and Indian agriculture initially focused attention on the nitrogen side of the fertilizer market in order to increase yields. They eventually ran into phosphate deficiencies which limited further yield growth. (They, then) focused on increasing phosphate demand. A similar thing happened on the potash and they’re now more focused on potash use. … This means that world potash demand should continue to grow quicker than nitrogen or phosphate in the future.”

Vroomen pointed to the connection between natural gas and fertilizer. “As a primary feedstock for ammonia production, historically the cost of natural gas alone accounted for 70 percent of total ammonia production costs. All that changed when U.S. natural gas prices rose dramatically after 1999.”

U.S. natural gas prices — “which historically averaged below $2 per million BTU” — quadrupled to over $8 by 2005. With such prices, natural gas accounted for nearly 90 percent of total ammonia production costs.

The consequences of this on the U.S. nitrogen industry were dramatic. “As gas prices rose, and continue to rise, producer margins were squeezed and eventually turned negative. A total of 25 ammonia plants (about 40 percent of total production capacity) closed from 1999 through 2005.”

The drop in domestic production shrank U.S. nitrogen supplies and raised prices. The United States then turned to the world market for nitrogen and, from 1999/2000 to 2007/2008, “imports rose from 6.3 million nutrient tons to 11.7 million nutrient tons annually. And this happened at the same time we had a dramatic increase in world fertilizer demand.”

The U.S. fertilizer industry — “which typically supplied 75 percent of farmer’s nitrogen needs from U.S.-based plants prior to 2000 — now relies on imports for over half of its nitrogen supply.”

12 potash producing countries

Only 12 countries in the world produce potash. Of those, only 10 export the commodity.

“Brazil and China use all the potash they produce and also import significant amounts. The largest potash producers — Canada, Russia and Belarus — account for two-thirds of total world production. These same three countries account for 75 of world exports.”

The 10 potash-exporting countries supply potash to over 100 nations. The largest importers of potash are China, the United States, Brazil and India.

“The 31 percent increase in potash demand through 2007/2008, and the continuation of strong shipments through the summer of 2008, led to the lowest level of potash inventories on record. … Again, that placed upward pressure on prices.”

As for shipping costs, “China’s booming economy and appetite for resources drove ocean freight rates up 500 to 600 percent from January 2001 through May 2008,” said Vroomen. “Higher energy prices also drove up the costs of truck, barge and ocean freight rates. Railroads no longer want to haul ammonia for liability reasons and have raised rates significantly.”

Another inhibitor: the U.S. dollar fell significantly into the summer of 2008. “This also played a part in increasing fertilizer prices. … Since fertilizer materials are priced in U.S. dollars around the world, exchange rates matter.”

Other factors tightened the market further. “The issue of hoarding, or limiting exports, first showed itself in the form of curbed food exports in 2008. … These same types of export restrictions were (later) put on fertilizer…

“The most significant example of this is China’s export tariffs on urea and ammonium phosphate. China is the largest exporter of urea in the world, accounting for 16 percent of world exports in 2007. China is also the second-largest exporter of ammonium phosphates in the world, accounting for 24 percent of exports in 2007. So, when China raised export tariffs to well over 100 percent (actually, up to 185 percent) in the spring of 2008, world markets tightened further.”

What did the record 2008 fertilizer prices do to fertilizer demand?

Vroomen first touched on the U.S. market.

“The U.S. economy was in pretty rough shape. This impacts growers’ psychology, which impacts planting and input decisions...

“Corn prices received by farmers peaked in June 2008 and have dropped since. Fertilizer prices continued to rise and were slower to come down. … (The two) don’t move together one-for-one but generally move together. … In 2008/2009, there was a big divergence – we’d never seen a divergence like that in corn and fertilizer prices.”

Was price induced

While all the data isn’t in, forecasts show “a 16 to 17 percent drop in U.S. nutrient use in 2009. That’s with almost no change in acres of the major crops. The entire drop in demand was price induced. In other words, application rates fell dramatically.”

Overall, nitrogen saw a 6 to 8 percent drop in 2008/2009, phosphate a 25 to 29 percent drop and potash a 32 to 36 percent drop. “Total use of N, P, and K — about 18 million tons of nutrients in 2009 — will be the lowest level in the United States since 1975.”

The impact of higher prices led to the highest usage drops in South America. “We saw large drops in Argentina and Brazil. China was down for the first time in many years.”

Bucking the trend, India’s fertilizer use was still up. That’s largely because India has a subsidy program where the price of fertilizer is fixed.

“Overall, the world saw a 2 percent drop in nitrogen … a 12 percent drop in phosphate … and a 19 percent drop in potash.”

This drove down prices from their historic highs.

In the United States, in response to the drop in demand and lower prices, “nitrogen production fell by 8 percent and phosphate production fell by 24 percent. North American potash production fell by 36 percent (there are now only two U.S. domestic producers of potash, so the data is combined with Canadian figures).”

The impact of the drop in demand is also clear with import numbers where nitrogen imports fell by 24 percent and potash fell by 43 percent.

2010 was hardly a smooth ride.

“Russian drought and wildfires caused a third drop in their (wheat) crop, with worldwide implications. On the soybean side, we have very strong exports mostly driven by the Chinese. The cotton market has turned around with world use exceeding production for the fifth straight year. With corn, the biggest surprise was USDA reducing yield estimates.”

In May 2010, the USDA came out with its first estimate of the new crop season. This was “before everyone had even finished planting corn. … We heard reports as the year went on, that the corn crop didn’t look as good as the USDA was projecting. Surprisingly, in August, they actually raised their yield estimate. Then, they seem to have caught up with what everyone else was observing — corn yields weren’t as good.

“If you look at what changed between May 2010 and the USDA’s report on Dec. 10, they started out with a yield of 163.5 bushels (per acre). They dropped that by nearly 10 bushels by December. … As a result, production estimates dropped by 6.2 percent, or over 830 million bushels.”

Big drop in supply

USDA increased the total use estimate from May by 1 percent. As a result, “there was a big drop in supply … and ending stocks are 54 percent lower than originally projected. The stocks-to-use ratio of 6.2 percent is very, very tight. … There’s been nearly a 50 percent increase in the corn price since May.”

Also, ammonium phosphate inventories reached record lows at the end of November. Potash inventories are tightening, as well, driving up prices.

“Fertilizer prices are rising, as you’d expect with rising demand. But crop prices are strong. So, we expect solid fertilizer application rates” to be used in 2011.

Looking at the U.S. crop acreage projections for 2011, USDA analysts “show strong acreage for corn and soybeans and a bit of recovery in wheat.

“As for nutrient demand levels for the U.S., after the big drop in 2008/2009, the 2009/2010 fertilizer demand was up 6 to 8 percent. We expect another 4 to 6 percent increase in nitrogen demand in 2010/2011.”

For phosphates, there was a 25 to 29 percent drop in use for 2008/2009. Vroomen and colleagues expect robust recovery in 2009/2010 and an additional 8 to 10 percent increase in U.S. demand in 2010/2011.

There was a big drop in potash use in 2008/2009 and significant recovery in 2009/2010. “We expect a 10 to 12 percent increase in 2010/2011.”

World projections released in early December show that on the nitrogen side, “we’re looking at about a 6 percent increase. With phosphate, we saw a big drop in demand but expect an 18 percent recovery worldwide. The big drop in potash demand carried over into 2009/2010 in South America – but we expect a jump of 17 percent in 2010/2011 in world potash demand.”

2011 bullet points

Entering 2011, Vroomen said growers should keep these facts in mind:

· On the potash side, specifically, (data suggests) India and China’s use will continue to grow even quicker than N and phosphate.

· On the negative side, ammonia rail rates will continue to rise.

· EPA has allowed higher amounts of ethanol in fuel.

· All these things should lead to increases in long-term fertilizer demand.

· In 2010/2011, “we have strong demand for nitrogen and, again, recovery in P and “K.

· Raw material prices, natural gas, “went very high in 2007/2008 and dropped dramatically with the development of shale gas production in the United States. Recently, those prices have risen rapidly.”

· Phosphate prices — historically, around $25 before hitting record highs in 2007/2008 — are lower but still well above historical levels.

· The value of the U.S. dollar is also negative. “It was very low in 2007/2008 and is again.”